Defence offsets to bring in $10b in 11th plan: India

India's new defence procurement policy, which eased licensing conditions for private sector and allows foreign players to bank offsets on contracts, is likely to bring in $10 billion to the country during the 11th five-year plan period, a study has said. The study carried out jointly by Assocham and Ernst & Young said the investor-friendly policy is also expected to hugely benefit the small and medium enterprises in the country. The new Defence Procurement Procedure (DPP-2008) was unveiled by Defence Minister A.K. Antony in August last year, but India has been pursuing the offsets policy since 2006. The DPP-2008 overrides the policies set forth by the Defence Ministry for procurement in 2006.

"As India has a large industrial base, offsets will further develop its technical and manufacturing potential and they will also help to increase investments in domestic research and development," the study said. It said the offset policy was expected to generate market-entry opportunities for private companies to invest in research and development and manufacturing of defence goods. Currently about 70 per cent of the procurement in value terms, is from foreign sources because the Indian public sector cannot deliver in terms of quality or speed on either research or production.

Under the offset policy, all foreign firms have to invest 30-50 per cent of the contract value in India on all deals of more than Rs 300 crore. However as per the new policy foreign multinational companies are allowed to park money with banks in anticipation of future contracts so that they need not have to manage money for the offset policy when the deal is clinched. The study said the Navy has increased its share of imports over the years whereas the Air Force has started focussing on indigenisation as well.

As far as the spending pattern of the Army is concerned, the focus has shifted between imports and indigenisation over the period 2001 to 2006, it said. "The public sector is facilitating greater private sector participation in the area of defence goods production which will also contribute to the growth of domestic industries. There are more than 5,000 companies supplying around 20 per cent to 25 per cent of components and sub-assemblies to state-owned companies. "The current defence market for private sector firms in India, which includes outsourcing from Defence Public Sector Units and Ordnance Factories is estimated to be $700 million," it said. This spend will further increase since the Indian defence industry is determined to increase the participation of private players

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